Devaluation has two sides, one negative and the other positive.
Devaluation reflects negatively on the savings of citizens, eating away from their value, and lowering consumers buying power, especially for imports paid in foreign currencies. Devaluation has led to the emergence of the dollarization phenomenon, which is when the USD (or any FCY) is used instead of the country’s local currency in dealings. For example, Lebanon’s main currency is the US dollar in transactions, not the Lebanese pound, and many economically weak countries face a similar situation.
The cost of external debt will also significantly increase given that the currency is weaker against other currencies.
Devaluation reflects positively on the competitive advantage for local exports, as local products will be cheaper compared to other products abroad when exported. Services will also be cheaper, and assets will look “discounted”, making them attractive to buy.
When is currency devaluation a good solution?
Currency devaluation is a good solution when exports are greater than imports, as the positive advantage will be higher than the negative damage, and vice versa.
China devalues its currency from time to time, for example, to support its exports, as in 2019 and 2015. The cons of currency devaluation were lower than the pros, so their devaluation had a positive impact.
In the context of its trade war with the United States, the solution was to deliberately devalue the national currency to absorb the effect.
In order to absorb the affects of devaluation, countries must export more, taking advantage of their cheap labor. In addition, the country’s products and services will be cheaper in comparison to other countries, making their products more desirable, bringing in more FCY, and thus, overshadowing the negative impacts of the devaluation.
This was not written by Thndr and this is not investment advice, you should do your own research before making investment decisions.
